Macroeconomics Assignment | Custom Assignment Help

Instructions: Answer each of the following questions on separate paper. Show your work
wherever possible, and justify your responses wherever appropriate.
Due: Friday, September 13th at the beginning of class

1. Consider a firm with the following production function:
• 𝑌𝑌 = 𝐴𝐴𝐴𝐴𝐴𝐴 + √𝐿𝐿
a. Suppose that the firm is employing 10 units of capital (K = 10) and total factor productivity is
5 (A = 5). How much total output will the firm produce when it employs 25 units of labor (L
= 25)? When L = 30? When L = 35?
b. Compute the marginal product of labor when labor employment (L) is 25, 30, and 35.
c. Compute the marginal product of capital when labor employment (L) is 25, 30, and 35.
d. Does this firm’s production function have diminishing marginal returns to labor? How can
you tell?
e. Are labor and capital “complements” for this firm? How can you tell?

2. Describe the difference between diminishing marginal returns to labor and capital, and
diminishing (or decreasing) returns to scale. If a firm experiences diminishing returns to labor
and capital, will it also necessarily experience diminishing returns to scale? Why, or why not?

3. Consider a perfectly competitive, profit-maximizing firm facing the following marginal
product of labor function and prices:
• MPL = 0.5A(K/L)1/2
• W = 40
• R = 60
• P = 10
a. What is the real wage rate paid by this firm?
b. If total factor productivity (A) is 50 and the firm is employing 16 units of capital (K = 16),
what will the firm’s quantity of labor demanded (Ld) be?
c. If the nominal wage (W) rises from $40 to $200, what will the new real wage rate be? All
else equal, what would the firm’s quantity of labor demanded (Ld) be at that new wage
rate?
d. Assuming that A = 50 and K = 16, graph the firm’s labor demand function (quantity of labor
demanded graphed against the real wage paid for labor) for values of the real wage
between 4 and 20. Be sure to plot at least 3 distinct points.
e. Now suppose that the firm increases its capital employment to 36 units (K = 36). Graph the
firm’s new labor demand function for values of the real wage between 4 and 20. Again, be
sure to plot at least 3 distinct points.

4. Describe the difference between a nation’s “real” wage rate and its “nominal” wage rate.
According to classical macroeconomic theory (Mankiw, chapter 3), what variables determine a
nation’s real wage rate? Describe two distinct “shocks” which, according to that theory, would
raise real wage rates.

5. Use the classical model of factor markets (Mankiw, chapter 3) to predict how each of the
following shocks should affect real wages (W/P) and the real rental price of capital (R/P). Be
sure in each case to clearly state your predicted direction of change (up, down, or no change)
for both variables and depict your predictions with supply/demand diagrams for both the labor
and capital markets.
a. The size of the labor force shrinks (LS decreases)
b. Technological innovation increases total factor productivity (A increases)
c. Congress cuts income taxes (T down)

6. How do macroeconomists typically define the “long run”? Why are the predictions of the
classical model normally thought to be only valid in the long run?

7. Use the classical model of a closed economy (Mankiw, chapter 3) to predict how each of the
following shocks should affect a nation’s real aggregate income (Y), national saving (S),
investment (I), and interest rate (r). Be sure in each case to clearly state your predicted
direction of change (up, down, or no change) for all four variables and illustrate your
predictions for S, I, and r with a supply/demand diagram for the loanable funds market.
a. The supply of labor (LS
) decreases
b. Technological innovation increases total factor productivity (A increases)
c. Congress cuts income taxes (T)
d. Autonomous investment (i0) increases

8. What is “crowding out,” and why does it happen when government purchases are increased?
Would an exogenous increase in autonomous consumption also cause crowding out? Explain.

9. Consider the following model of a closed economy:
• YS = AK1/2L1/2
• C = 200 + 0.75(Y – T)
• I = 1200 – 10,000r
• KS = 100
• LS = 225
• A = 24
• G = 1000
• T = 800
a. According to classical macroeconomic theory, what must the real wage (W/P) and real
rental price of capital (R/P) be to establish equilibrium in the labor and capital markets?
b. What values of real aggregate income (Y) and national saving (S) result from full
employment of labor and capital?
c. What must investment (I) and the interest rate (r) be to establish equilibrium in the market
for loanable funds?
d. Recalculate the equilibrium values of W/P, R/P, Y, S, I, and r if the labor supply (LS
) increases
from 225 to 625 (all else equal).
e. Using the original quantity of labor supplied (LS = 225), recalculate the equilibrium values of
W/P, R/P, Y, S, I, and r if government purchases (G) decrease from 1000 to 200 (all else
equal).

10. Consider an economy with a marginal propensity to consume of 0.60.
a. What would its marginal propensity to save be?
b. What would happen to consumption (give the direction and size of the effect) if income
taxes (T) were to increase by 100, assuming that real aggregate income is unaffected? What
would happen to private saving? To public saving? To national saving?
c. Suppose, instead, that government purchases (G) increase by 100. Assuming that aggregate
income is unaffected, what would happen to consumption? What would happen to private
saving? To public saving? To national saving?

11. According to classical macroeconomic theory, what determines the size of a nation’s real
aggregate income? Based on that theory, what kind of public policies could be used to increase
a nation’s income? Give at least two specific examples.